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What is government for? — Paul Ryan’s unanswered question

It was billed as a debate over the size of government. But within the first few minutes Congressman Paul Ryan had changed the subject. Focusing "just on size entirely misses the point", he said, "We should not be asking how big should our government be, we should be asking what is our government for."

For Hayek: "the most desirable order of society one which which would choose if we knew that our initial position in it would be decided purely by chance". Like many liberals, he believed that the government’s role was to create a system that would enable each individual to achieve their own goals. As Ryan acknowledges, Hayek believed that government had an important role to play in addressing market failures and securing a minimum standard of living. He certainly didn’t believe that taxation is theft.

Will Wilkinson suggests that Hayek’s philosophical position is remarkably close to liberal philosopher John Rawls‘. Given the risk of ending up at the bottom of the social hierarchy if our initial position is determined by chance, Rawls argued that policy makers should pay particular attention to the wellbeing of the least well off. The same conclusion seems to follow from Hayek’s position.

If this is right, then the size of government question isn’t a moral question, it’s a practical one. We need to know whether cutting government spending can lift in economic growth in a way that makes those at the bottom better off than they are now. Or alternatively, whether the benefits of greater spending outweigh any negative impact on growth (and perhaps spending on things like early childhood education could actually boost growth).

Ryan argues that government ought to be providing a basic safety net rather than creating huge entitlement programs that benefit the middle class and the wealthy. But the trouble is, America’s welfare system is not only underfunded, but poorly targeted. Entitlement programs are biased towards the well-off elderly and against the working age poor and their children.

As the University of Arizona’s Lane Kenworthy writes, "The United States spends more money on social protection than is often thought, yet that spending doesn’t do nearly as much to help America’s poor as we might like."

At Frum Forum, Noah Kristula-Green zeroes in on the political challenge involved in cutting the deficit without raising taxes: "The problem is that we have a hyper-generous welfare state for old people. Where exactly else does Ryan see the pernicious reach of government hand-outs?"

Many US political analysts regard entitlements to the elderly — particularly health care entitlements — as the third rail of American politics. But Ryan believes that the debt crisis has changed that. In an interview with the Christian Science Monitor he said: "what I’m basically saying is the third rail is not the third rail anymore. The political weaponization of entitlement reform is no longer as potent as it used to be."

The trouble with Ryan’s arguments in the debate is that he never gets around to answering his own question — What is government for? True to his neo-conservative roots, Brooks argues that government ought to promote a virtuous citizenry. But Ryan simply asserts that Americans must choose between a European-style social democracy and a free market system that allows entrepreneurs to hang onto to more of their earnings. He doesn’t tell his audience how to choose.

The choices are more complicated than Ryan makes out. There’s no single European model of social democracy. And as the Economist’s Schumpeter writes, Denmark and the Netherlands have both vibrant free markets and large welfare states. Neither resembles Greece. So clearly Americans have more options than Ryan allows for. Making a principled choice requires an answer to Ryan’s question — What is government for?

Update: Ryan might pay lip service to Friedrich Hayek, but at The New Republic Jonathan Chait argues that the major influence on his thinking is Ayn Rand. The overwhelming thrust of Ryan’s reforms is "in every way is to liberate the lucky and successful to enjoy their good fortune without burdening them with any responsibility for the welfare of their fellow citizens."

According to Chait:

The roadmap clarifies the essence of the Republican Party’s approach to domestic policy issues. The essence is opposition to the downward redistribution of income. The principle first emerged under Ronald Reagan, but only in fits and starts–Republican presidents agreed to a tax reform in 1986 and a deficit reduction in 1990 that did redistribute income from rich to poor. Over the last twenty years, though, opposition to downward redistribution has hardened into the sacred tenet of Republican policymaking. Ryan’s plan both codifies this principle and shows just how far the party is willing to go in its service.

Every major element of Ryan’s plan reflects this commitment.

In a later post, Chait adds that Ryan’s plan "would create a higher deficit than Obama’s plan for well more than a decade."

An example of where it has come up indirectly in Australia is in the latest debate on whether or not there should be a business case for the NBN.

If you take the view that government is merely an enabling mechanism where a group of people can gather resources to undertake activities that individuals themselves cannot, then merely a collective decision to do something is sufficient. (ie if we want an NBN and decide collectively to have the NBN, then business cases are helpful, but not essential). In this view government is just a vehicle for us to get the broadband capacity we want, and we don’t have to justify it any more than a personal holiday in Europe next year if I want it.

If, however, one takes the view that government has some further role of telling us what we can or cannot have, and that despite deciding at the ballot box we want an NBN, we still should not be able to have it pending a business case, then government has quite a different role. I am not quite certain what that is, but in the NBN debate, presumably those who advocate the need for a business case, even though it was a deciding policy of the incoming government, had in mind a view of government that begged Congressman Ryan’s question.

Marks, that’s a pretty interesting idea re the NBN. But the whole concept of ‘mandates’ has been a bit bogged down post Howard.

Don, I started reading your piece thinking that Paul Ryan was some thoughtful, intelligent contributor from the Right of US politics. get to the end of it and I find out that it’s all more of the same, very disappointing.

I’m not quite sure what you’re trying to argue. If you’re claiming that larger government is doomed to failure by comparison with smaller government, the facts don’t seem to align with your prejudices. According to this Wikipedia article, Norway has a higher GDP per capita than the US, and yet Norway’s total tax-to-GDP ratio, 43.4%, is a great deal higher than that of the US at just 25.6%.

Similarly, countries like Sweden and Denmark also rank in the top 20 wealthy countries despite much large social welfare states and much higher total tax takes as a proportion of GDP than the US.

The most one can say on the facts is that perhaps a larger social welfare state might on average mean very marginally lower per capita GDP, but it’s a trade-off for greater social justice/fairness i.e.a decent social safety net. It depends on what sort of society you prefer. It might also be that higher taxes can be better tolerated by business where it has immediate access to a highly skilled workforce and large, wealthy markets right on the doorstep, as is the case in Europe. Personally I think Australia has the balance about right given our location and other factors.

True Don, he didn’t think it was theft, like Milton Friedman didn’t think it was theft when he suggested that the “right” take for government should be around 10% of GDP.

This is what Hayek said suggesting he knew the difference between “distribution” and welfare.

“Our objection is against all attempts to impress upon society a deliberately chosen pattern of distribution whether is be an order of inequality or equality.”

Ken:

Ryan’s plan looks remarkably like our social program reforms reforms enacted by Hawke/Keating with the added recent change by the current Labor government of raising the retirement age.

Social security in the US means that Warren Buffet has been receiving the pension since he turned 65. There is no means test for the pension in the US as everyone receives it whi is able to show 40 quarters of working life (approx).

There is also around a %10 co-payment in medicare; about one of the lowest levels in the world.

In other words there’s a ton of fat in the US entitlement budget that could be stripped out to place the country on a much sounder financial footing.

Ryan’s plan is actually quite simple and there would be mo hardship for the less well off. In fact it resembles ours to the extent that if you’re a decent income earner, you really need to look after your own retirement through super which the US calls 401K. Any Australian aware of our previous reforms would immediately recognize the Ryan plan.

The US corporate tax rate is 35% by the way… one of the highest in the western world and depending where you live the tax rate is around 50%.

For instance a NYC taxpayer pays

Fed tax including FICA 36% approx

State tax 8.75% approx

City tax 4.25%

There is a sales tax of 8.5%

Most high US income earners live in the high tax states. The idea that the US is low taxed is generally a fiction.

Similarly, countries like Sweden and Denmark also rank in the top 20 wealthy countries despite much large social welfare states and much higher total tax takes as a proportion of GDP than the US.

True.. so we ought to compare like with like. Connecticut would looks pretty much like Sweden… or even take the US states which have large nordic immigrants like Minnesota and Wisconsin. How do they compare.

The US is a big place with large regional influences and a proper comparison ought to be made with the “regions” of the EU.

Then there is this sort of thing explained here on how to accurately measure welfare. In same ways the US already looks like the Nordic countries!

Practically identical to Danish levels! But the system in the Nordic countries is more comprehensive, streamlined, and state-dominated than the U.S.’s more fragmented, variable, and privately-augmented system of assistance.

If we take into account these differences in style, the appropriate measure is net public and private social welfare expenditures per capita. By this metric, the U.S. then leads the way at $7,800, followed by Sweden at $6,700, Norway at $6,300, Denmark at $5,800, and Finland at $4,900

and

What to make of all this? First, the U.S. welfare system is very generous. The hackneyed stereotypes are wrong. Second, it’s important to remember that the U.S. has lots of states, lots of variability in state-level policy, and very unevenly distributed pockets of severe poverty. In some states, the patchy federal system is well-filled in and augmented by state and local government and by assistance from non-state civil society orgs. In some states, not so much. In any case, that Americans at the national 10th percentile do as well as anywhere in the world is a testament to the fact that the level of public assistance at this and lower levels in some parts of the U.S. are probably better than anywhere in the world. I’d bet my drinkin’ money that Iowans at the first percentile of the Iowa income distribution are as well compensated for their disadvantage as are similarly struggling Danes.

Actually, I think there is no comparison to be made between the US and the Nordic countries. The US is spending a huge proportion of the revenue it collects on the military, whereas the Nordic states are not. Thus, where the money is flowing is rather different, even if tax takes are similar.

All figures that I’ve seen show US total tax take as the lowest of all developed nations (Turkey has a lower figure but is hardly a developed nation on any sensible measure). See e.g. http://www.oecd.org/dataoecd/13/38/43098708.xls which shows estimated US total tax take (including all federal, state and local taxes) as 26.9% of GDP and Norway as 42.1% as at 2008. Australia is also a low-taxing country by developed nation standards at 30.8% of GDP.

It raises the obvious question of how the US could be such a low taxing country if your figures for New York are actually correct? The answer seems to be that they’re not!! According to this article from the New York Post (a Murdoch publication so I’m sure you’ll automatically accept its reliability), the top rate of federal income tax in the US is 35% while net state and local income taxes (net of deductions including federal deductibility) are 5.8% for high income earners (those earning more than $500,000 pa!!). Thus total income tax for high income earners is 40.8% which compares with a top marginal rate in Australia of 45% + Medicare levy and surcharge totalling 2.5% i.e. a total of 47.5%. As you can see, high income earners are MUCH better off in the US. Similarly the 8.5% NY sales tax compares with Australia’s federally levied GST of 10%. AFAIK there is no broad-based federal sales taxes or GST in the US.

Moreover the federal income tax rates are even more generous to the rich than they look by merely quoting the top marginal rate. The top marginal rate of 35% cuts in at a threshold of $373,651, the second highest rate of 33% cuts in at $171,851 and the third highest rate of 28% at $82,401. By comparison, Australia’s top rate of 45% cuts in at $180,001 and our second highest rate of 37% at $80,001.

Given that picture you can see why US total tax take is around 26.9% of GDP while Australia’s is higher at 30.8% but still very low by the standards of other advanced economies. The Scandinavian countries generally speaking are just as prosperous as Australia (see the link in my previous comment) but have much higher total tax takes (well in excess of 40% of GDP).

It’s actually changed since I left where both state and city are lower by a small margin.

In addition, some states allow cities and/or counties to impose income taxes above and beyond the federal and state income taxes. An example is New York City, where there is both a state income tax of up to 6.85%[4], (8.97% for 2010)[5] and a city income tax, up to 3.648%[6]. The maximum rate in the city limits of New York City (as of 2007[update]) including federal, state, and city taxes is therefore 45.498%, or 1.3 times the 35.0% rate inside “federal income tax only” cities such as Seattle, Houston, Dallas, and Miami.

If you’re going to persist in ignoring the federal deductibility of state and local income taxes you are, to be blunt, wasting everyone’s time. Given that we’re debating total tax take, and separately the question of how much tax IN TOTAL individuals actually pay, you can’t have a meaningful discussion about either of those topics without taking into account the fact that state and local income taxes are deductible from federal income tax. Ignoring that simply results in meaningless figures.

“And what exactly has “Murdoch” have to do with reliability?”

An excellent question.

BTW I’m not arguing about corporate tax rates in the US, although I note that they appear to have progressive lower corporate tax rates for companies earning less than about $300,000 pa (which I suspect would include quite a high proportion of small businesses). Moreover, you can’t really get a valid comparative picture of US corporate tax rates versus Australia without comparing the total regime of deductions, rebates, allowances etc. I have no idea how those stack up against each other.

In any event, while arguing about the minutiae of comparative tax rates is all very interesting (for some anyway), the bottom line is that the US total tax take is significantly lower than any other advanced economy, while countries like Norway with much higher total tax take are actually richer per capita. The only point I was and am seeking to make is that there is no neat, clear connection between tax rates, size of government and national wealth/income. The data suggest that there is a fairly wide range of fiscal settings that are, at least potentially, equally consistent with a nation’s prosperity.

If you’re going to persist in ignoring the federal deductibility of state and local income taxes you are, to be blunt, wasting everyone’s time.

Fine with me. However the assertion is correct that high income US states pay a higher rate of tax. If you don’t have a mortgage tax rates (interest is deductible) in places like NYC tax can be quite high.

There is also an issue with the bias of the OECD when the overwhelming number of the members states are high taxing European countries.

The real point as I see it is the US providing reasonable levels of welfare which for some reason the gold standard seems to be Nordic countries. It appears that they actually may be.

Norway is a special case. The oil effect on the small size of the population has an even bigger skewing that Saudi Arabia and would be more comparable to a small sheikdom literally swimming in oil.

venture into the statistics game at your peril! The low recorded US tax rate is not quite the whole story because governments can make it compulsory for individuals to make expenditures. For instance, I believe US companies have a legal obligation to insure the health of their employees, which turns out to cover 3/3 of the US population of the working-age range. That insurance effectively comes out of wages but is not counted as a tax. In much of Europe, that insurance is organised via the state, i.e. the state collects the taxes and hands out the insurance. Same payer, similar outcome, but it is counted as part of the state taxation system.
I you would add health costs to the US taxation data, then suddenly the US would be one of the most heavily taxed countries in the world.
Similar considerations apply to many areas. My perception is that the true proportion of discretionary income is pretty much the same accross the Western World: Western administations make similar choices as to how they force their populations to live. In one country you might pay a toll if you are on the highway and in another country the state put down the highway and the road appears free though you pay double the price for petrol, but one way or another the road is there and car users pay for it.

that is 2/3 and the health insurance does not appear to be mandatory for US firms. Nevertheless, the point remains the same: the outcome is quite similar between the US and Europe, but the method via which payment is organised differs.

For instance, I believe US companies have a legal obligation to insure the health of their employees, which turns out to cover 3/3 of the US population of the working-age range.

I don’t think they are compelled, Paul, at least when I was there. I think the rule was that you can’t just offer health-care to one select group of employees. It had to be all or nothing. Competitive pressures then obviously took over. I hasten to add that this could have been a NY state based rule and didn’t apply elsewhere.

But as you probably are aware you need a special higher level degree to just figure out the hodgepodge of a medical insurance system with state based systems having to cover both federal and different state mandates.

The real point though is … can the US afford to keep going the way it is or change? I think the US, unlike most of the EU is quite capable of providing the current level of support to the people that need it most, as there is a ton of fat in the US budget and still arrive at a surplus over a few years. The Ryan plan to all intents and purposes is a set of reforms that seem similar but not identical to the various Hawke reforms of the 80′s. It seems easy on paper however the American mindset is very difficult to change over the issue of pensions/ means testing and the vast majority of people think and believe that FICA paid in to support their retirement is actually their money and any attempts to take it away is stealing. Perhaps with the current crisis those attitudes may change a little.

I’ve just spent a bit of time Googling and can’t find anything suggesting that corporations are legally obliged to provide health care insurance to their employees. Indeed quite the contrary.

Nevertheless, according to this Wikipedia article some 59.3% of Americans DO have health care insurance of some sort via a scheme which is at least partly employer-funded. However that appears to be because health care insurance is in effect a tax-free fringe benefit so there are substantial tax incentives for both employers and employees to package remuneration to include health insurance. Nevertheless, you’d be stretching to include US health insurance premiums in the calculation of total tax take.

BTW Joe

I don’t know enough about Paul Ryan’s proposed reforms to know whether you’re generally correct that they’re aimed more or less at stripping out middle class welfare and producing better targetted needs-based welfare programs more along the line of Australia’s system (which is far from perfect but said to be better targetted than just about all other comparable countries, or so I understand). If so then you and I would be basically in agreement. Certainly Don’s description of Ryan’s proposal (a voucher system) sounds not unlike Australia’s Medicare scheduled fee which many doctors exceed and only those who opt to bulk-bill actually charge.

Well, I suppose it snows a lot in Minnesota and lots of people who live there have Nordic sounding names. But there’s just no way to argue that the US welfare state is as generous to people at the bottom as the Nordics.

Will Wilkinson is getting his numbers from a paper by Price Fishback. And you need to pay attention to what Fishback is doing. He writes:

Inclusion of mandatory and private social expenditures raises the American share of GDP devoted to social expenditures to rank among the middle of the Nordic countries.

Note the term ‘private social expenditures’. Private social expenditures account: “for roughly two-fifths of all social expenditures” according to Lane Kenworthy. These consist “mainly of employer contributions to health insurance and employment-based pension benefits.”

As you might imagine, these aren’t much benefit to poor Americans because they don’t have jobs that offer retirement and health benefits.

If you want to understand how to compare welfare states, download the draft of Kenworthy’s forthcoming Progress for the Poor.

I note Swedes get free dental care until age 20, while those aged 20 and over receive an annual dental allowance and a subsidy at the rate of 85% if their treatment costs exceed a certain limit.

Alternatively, from time to time we hear of dental checks on elderly Australians and Americans that reveal disturbingly high rates of diseased gums and ulcerated, septic mouths that ooze puss.

Maybe I’m old fashioned but I think I prefer the Swedish option.

The major argument for universal welfare, such as the Swedish system, is that the more vocal, erudite, organised and involved middle class benefit from it just as much as the poor and this makes it exceedingly difficult for politicians to gut the system. On the other hand, it is comparatively easy for Governments to slash welfare that only benefits mostly apolitical, disorganised and fatalistic poor folk.

Fair enough Don… I’m not an expert on comparative studies of US vs other welfare systems

I don’t know why you would want to strip out the health insurance out of the US figures no matter how it’s paid for, as it still is a transfer of sorts from employers to employees. It may not be a strict mandate, but it’s pretty close to being one.

I think the point on the private vs public that you brought up is reasonable but it is a direct charge from firms bottom lines.

Private health care is damn expensive in the US and I’m sure its cost takes up a large part of the private contributions you mentioned.

Poor Americans go straight on Medicare for their medical insurance as far as I understand it.

I suggested the comparisons between the Nordic(ish) American states because I think the cleaner way to compare is US regions to European States. I thought a really apt comparison is where the two people are of similar descent for a large swag of the population.

Having said all that Paul F is right to suggest that these comparisons are really damn hard to do.

“[T]he fact that the young supply the police and the army will decide the issue: concentration camps for the aged unable to maintain themselves are likely to be the fate of an old generation whose income is entirely dependent on coercing the young”

I don’t know enough about Paul Ryan’s proposed reforms to know whether you’re generally correct that they’re aimed more or less at stripping out middle class welfare and producing better targetted needs-based welfare programs more along the line of Australia’s system (which is far from perfect but said to be better targetted than just about all other comparable countries, or so I understand). If so then you and I would be basically in agreement. Certainly Don’s description of Ryan’s proposal (a voucher system) sounds not unlike Australia’s Medicare scheduled fee which many doctors exceed and only those who opt to bulk-bill actually charge.

Ken,

Ryan’s is just one plan. The more likely to be acted on or seriously discussed/considered, simply because of it’s provenance, is Obama’s bi-partisan debt commission that is supposed to be reporting soon (apparently they can’t agree on the votes at the moment). Eskine Bowles (Clinton’s former chief of staff and (GOP)ex-senator Simpson have given a broad summary the formal report but the formal report isn’t out yet.

There’s really not much time for them to figure something out as a debt/GDP ratio of 90%, which according to one academic study is the point of not return in terms eventual default. They’ve reached that threshold now.

The one mitigating standout in terms of the the US budget is that there’s so much fat in there it resembles a Japanese beer fed cow.

Conrad alluded to the defense part of the budget. It’s $700 billion a year. They don’t count the Afghan and Iraq war which is treated separately costing $100 billion. They could easily drop that down to $500 or less and still have the most expensive military in the world by far.

They spend around $100 billion alone on intel and we know how good that is seeing some snotty nosed young 20 something kid sent a chuck of it over to Wikileaks.

The perfect illustration of wastefulness is the presidential plane that costs something like $200,000 per hour to run. Why on earth any president requires a jet that size is beyond all reason. They are just not that important.

I’m not quite sure what you’re trying to argue. If you’re claiming that larger government is doomed to failure by comparison with smaller government, the facts don’t seem to align with your prejudices.

I claim that creating a logical separation between a moral system of government and a practical system of government is a waste of everyone’s time.

Every moral system must be practical for it to be worth considering, and every system that is going to be practical in the long term is going to come up against moral questions that limit the options available. There’s no room for evasion in either dimension.

Norway has a higher GDP per capita than the US, and yet Norway’s total tax-to-GDP ratio, 43.4%, is a great deal higher than that of the US at just 25.6%.

Resources are a great way to provide funding for wealth redistribution. Australia has regularly done the same thing. We can probably keep doing it for quite some time since we have a lot of resource.

Anyhow, the equally valid explanation for rich countries having large government is that they can afford to be inefficient since their superior technology gives them plenty of productivity gains. Correlation does not prove causation, it can work either way.

Every moral system must be practical for it to be worth considering, and every system that is going to be practical in the long term is going to come up against moral questions that limit the options available.

Tel – I won’t argue with that.

But I think you can make a distinction between moral questions and practical questions.

For example, let’s say you’re on a ferry and you see one of your fellow passengers fall over the railing and into the sea.

Here’s a moral question — Do you have an obligation to save her if you can?

And a practical question — Should you throw her a life buoy, use a long pole, or get the captain to turn the ferry around?

I’m arguing that the size of government is a practical question in this sense.

Hayek suggest that: “the most desirable order of society one which which would choose if we knew that our initial position in it would be decided purely by chance”. To make this normative decision we need to answer positive questions. For example, whether we should choose state socialism or a free market system depends on the practical results of that choice.